IRA Rules

Posts Tagged ‘individual retirement account’

Many times an investor’s number one objection to making an IRA contribution is that the funds are not accessible without a penalty or tax consequence under IRA rules. Under Roth IRA rules, however, contributions to a Roth IRA individual retirement account are never tied up. Roth IRA account owners may withdraw their contributions at any time, for any reason, without tax or penalty. Is this too good to be true? Actually it is. There are some little Roth IRA rules you still have to follow before you take advantage of the Roth IRA distribution rules. 

Distributions of earnings may be taken at any time, but the tax treatment is different depending upon the age and circumstances of the recipient. 

Tax and Penalty Treatment of Roth IRA Distributions

There are three different tax treatments for distribution of earnings from Roth IRA, under Roth IRA distribution rules: 

Roth IRA distribution rules #1: Tax-Free, Penalty-Free (“Qualified Roth IRA Distributions”)

Distribution taken after “Five-Year Holding Period” of a Roth IRA individual retirement account, under the Roth Ira Distribution Rules, and either: 

• After age 59½

Roth Ira Distribution Rules #2: Tax, No Penalty (“Non-Qualified Distribution”)

Distribution taken from a Roth IRA individual retirement account before the “Five-Year Holding Period” and either: 

• After age 59½

Roth Ira Distribution Rules #3: Tax, With Penalty (“Non-Qualified Distribution”)

Distribution taken from a Roth IRA individual retirement account, under the Roth Ira Distribution Rules which is either: 

• Before age 59½

The concept of life expectancy is very important for the calculation of Required Minimum Requirements or RMD. RMD and life expectancy are discussed in this section of the IRA Rules website. 

Important RMD Considerations

It is important that IRA owners comply with IRA rules, IRA distribution rules, and IRA rules regarding required minimum distribution (RMD). Failure to take theRequired Minimum Distribution (RMD) may subject the IRA owner to an excise penalty tax of 50% of the amount that should have been distributed. Some important facts of IRA Rules regarding Required Minimum Distributions (RMD) are laid out below. 

• Required Minimum distributions (RMDs) are merely annual minimums. IRA distribution rules allow greater distribution amounts to be taken each year.

Ira Rules on How to Determine the Life Expectancy Factor (for IRA owners)

Under Ira Rules, there are now only two calculation choices for Life expectancy: 

1) Uniform Life Expectancy:

When the IRA owner is alive, the life expectancy factor used to calculate Required Minimum Distribution (RMD) will be obtained from the Uniform Table, under Ira Rules. The IRA owner will refer back to the Uniform Table each Distribution Calendar Year (DCY) and use the factor that appears next to the IRA owner’s age on his or her birthday during that year. The Uniform Table will generally result in a smaller annual RMD amount for most IRA owners andstretch-out the IRA for a greater number of years than would have been the case under the old RMD rules. 

OR 

2) Joint Life Expectancy, Recalculating Both Life Expectancy:

Under the new RMD rules, all IRA owners must use the Uniform Table except for an IRA owner whose spouse is the sole primary beneficiary for the entire Distribution Calendar Year (DCY) and the spouse is more than 10 years younger than the IRA owner. This group of IRA owners may use the Joint Life Expectancy Tables. For this table, the ages of the IRA owner and the spouse as of December 31st of each Distribution Calendar Year (DCY) are used to find that year’s life expectancy factor.

Roth IRA Rules (Continued)

Recap of major differences between Roth IRA rules and traditional IRA rules:

While traditional IRA rules allow eligible individuals with any income size to contribute to traditional IRA individual retirement accounts, Roth IRA rules do not. Simply put, if you earn a lot of money, then you can set up a traditional IRA but not a Roth IRA individual retirement account.

Another major difference between Roth IRA rules and traditional IRA rules is the age eligibility. Anyone can open a Roth IRA account providing he or she satisfies the income limit requirement under Roth IRA rules, whereas you have to be under 70½ to contribute to a Traditional IRA account.

Roth IRA rules on contributions

Roth IRA rules are very specific about how much income, called modified adjusted gross income or MAGI, you are allowed to make before you are no longer eligible to set up a Roth IRA individual retirement account. The table below shows modified adjusted gross income limits and how much you are allowed to contribute to a Roth IRA account.

Roth Ira Rules of deductible contribution

Roth Ira Rules do not permit deductible contributions to Roth IRA individual retirement account.

Roth Ira Rules for non-deductible contributions

Unlike contributions to Traditional IRA accounts, only non-deductible contributions to Roth IRA accounts are permitted. See “Total Contributions” for contribution limits to Roth IRA accounts under Roth Ira Rules.

Roth Ira Rules for catch up contributions for Roth IRA

Catch up contributions for Roth IRA individual retirement accounts, under the Roth Ira Rules, are available for individuals age 50 or over. Roth IRA account owners of 50 and over may make additional catch-up IRA contributions as specified by Roth Ira Rules and other Ira Rules. The maximum contribution limit is increased by $1,000 for year 2006 and thereafter. The contribution limit for catch up IRA contribution under both traditional Ira Rules and Roth Ira Rules used to be just $500.

Contribution Deadline for Roth IRA

Under the Roth Ira Rules, you may contribute or put money into your Roth IRA accounts no later than tax filing due date. No extensions.